Energy Antitrust Weekly: Chesapeake/Southwestern Deal Gets Second Request; FTC Releases Statement Approving Global Partners, Gulf Oil Acquisition and Protecting Maine Home Heating Oil and Diesel Buyers; HSR Period Expirations for Chord/Enerplus and Sunoco/NuStar

Published on Apr 11, 2024

Second request pushes Chesapeake/Southwestern deal back. Chesapeake Energy Corporation (CHK) and Southwestern Energy Company’s (SWN) planned merger received a second request from the FTC on April 4, with regulators seeking more information about the impacts of a merger that’s expected to create the nation’s largest independent natural gas producer. The deal will be delayed to the second half of this year, the companies added.

Analysts said concentration is expected to rise significantly amid the ongoing wave of oil and gas consolidation—particularly among natural gas producers.

“Oil is still a global commodity, so it’s hard to make the case that a Permian company no matter how big they are is setting the price of oil,” Alex Beeker, a research director for Wood Mackenzie, told The Capitol Forum. “Henry Hub, we might be treading into the waters where there’s enough concentration that companies could start to have greater influence over the price, the more they control.” Henry Hub is a Louisiana natural gas hub that’s often cited as a benchmark natural gas price.

While the $7.4 billion Chesapeake-Southwestern mega-deal would have major impacts on natural gas production in Louisiana’s Haynesville shale in particular, the deal would also drive an increase in concentration in northeastern Pennsylvania, where the companies’ footprints overlap heavily, according to a Capitol Forum Upstream analysis.

In the Haynesville shale, the two producers will be behind over 40% of regional output, as The Capitol Forum previously noted, and impacts for the Haynesville have drawn significant focus from analysts.

Both companies are also a major presence in northeastern Pennsylvania, a region commonly known as the “dry gas window” of the Marcellus shale because it produces mostly natural gas and just a tiny amount of natural gas liquids (NGLs) or oil.

Across a six-county region in Northeastern Pennsylvania, Upstream shows Chesapeake Energy produced 38% of total regional output in 2023, while Southwestern produced 12.2%—bringing the combined output of the two companies to just over half of the region’s total production last year.

Data Source: TCF Upstream, 2023 total production of natural gas, natural gas liquids and oil in thousand cubic feet equivalent (Mcfe) for six Pennsylvania counties: Susquehanna, Bradford, Lycoming, Tioga, Wyoming and Sullivan.

Chesapeake and Southwestern did not respond to a request for comment.

Both companies have significant footprints in some of Pennsylvania’s most productive counties. For example, in the state’s top county, Northeastern Pennsylvania’s Susquehanna County, Chesapeake and Southwestern are the second and third operators by volume, according to Upstream, producing 13.7% and 21% of Susquehanna county’s total output in 2023, for a total of 34.7%.

In Bradford County, the third most-productive county in Pennsylvania, their combined presence is even stronger. Two companies produced 87% of Bradford County’s total output in 2023, according to Upstream, with Chesapeake contributing 79.4% and Southwestern 7.5%.

That said, regional production shares are just potential indicators of potential market concentration and antitrust regulators will still need to confront questions of market definition as they assess each deal.

In EQT/Tug Hill, the FTC approached a market for natural gas at a broader level, focusing on the entire Appalachian Basin, which it defined to cover Pennsylvania, Ohio, West Virginia and other states.

Chesapeake and Southwestern combined represent just over a 21% share of Appalachia’s total natural gas output from June 2022 to July 2023, The Capitol Forum previously reported.

That’d put their shares in Appalachia below the thresholds for market share in the 2023 merger guidelines, which note that “a merger that creates a firm with a share over thirty percent is also presumed to substantially lessen competition or tend to create a monopoly if it also involves an increase in HHI of more than 100 points.”

It’s worth bearing in mind that oil and gas merger wave could still be underway, potentially drawing in other Appalachian or Haynesville shale operators.

“I think there’s still room for a few more on the gas side and in the Permian, for example,” Beeker said. He predicted the pace of mega-deals might slow, as the number of companies that haven’t yet participated dwindles, but that bolt-on acquisitions and other smaller deals could still be on the horizon.

“I do think there’s a few deals that might make sense,” Beeker said, citing Range Resources (RRC) and Antero Resources (AR)—also both major Appalachian producers—as “two companies to definitely watch over the next year.”

Market concentration numbers aren’t the only thing that can draw antitrust scrutiny. Beeker also pointed to the ways producers like Chesapeake are talking about plans to curb production amid the wave of oil and gas M&A activity. The Capitol Forum has previously reported on concerns over comments about capital discipline by Appalachian natural gas liquids producers, including Southwestern Energy.

“What I found quite interesting is that if you listened to the Q4 Chesapeake call, when they talked about scaling back activity, management was very, very careful in the words they used, because likely they’re doing that to help the market balance,” Beeker said, “but they made sure to stay away from any of that language and they emphasized that at these prices, drilling new wells is uneconomic and it’s purely an economic or non-economic decision. It’s nothing else to do with that.”

Regulatory Agency Antitrust Agenda

FTC responds to updated Global Partners, Gulf Oil acquisition, citing move to protect competition in home heating oil and diesel markets. In a statement released Tuesday, the FTC expressed its approval of the updates Global Partners (GLP) made to its acquisition of Gulf Oil in response to antitrust concerns both the FTC and the Office of the Maine Attorney General raised about the deal.

The concerns were due to one of Gulf’s refined products terminals in Portland, Maine, which was removed from the deal back in February, according to a Global Partners earnings call. As a result, the purchase price of Gulf Oil decreased from $273 million to $212.3 million.

FTC Bureau of Competition Director Henry Liu said the agency was “pleased” with the actions taken by the companies.

“Robust competition at all stages of the petroleum products supply chain is critical to ensure affordable access to the fuels that power people’s vehicles and heat their homes and businesses,” FTC Bureau of Competition Director Henry Liu said in a statement. “This acquisition threatened to limit competition and increase prices, affecting consumers who use heating oil and diesel fuel in and around the Portland area.”

The FTC did not respond when asked why the agency had waited a month after the updated merger agreement to release a statement of their approval.

Upstream Sector

HSR period expires for Chord/Enerplus deal. The HSR period expired on April 5 for Chord Energy Corporation’s (CHRD) $11 million acquisition of Canadian oil and gas producer Enerplus Corporation (ERF). The companies plan to close in the second quarter, they said in a Monday news release. They’d previously projected a “mid-year” close.

The combined company will be the largest operator in the Williston Basin, which encompasses eastern Montana, western North Dakota, South Dakota and some parts of Canada. Enerplus also has a presence in Appalachia, specifically in Northeast Pennsylvania, where it owns interests in dry gas wells that it does not operate.

The deal’s closure remains subject to certain closing conditions, including Chord stockholder approval.

Midstream/Downstream Sectors

HSR expires for Sunoco’s $7.3 billion NuStar purchase: NuStar (NS), a pipeline, terminal and storage operator, said it expects to move forward following a scheduled May 1 vote on an acquisition by Sunoco (SUN) after its Hart-Scott-Rodino waiting period passed without a second request on April 8.

The companies disclosed on March 20th that they had pulled and refiled their HSR filings last month, on March 8.

Similar to Gulf Oil, NuStar operates storage and terminal facilities for fossil fuels and other products. “NuStar currently has approximately 9,500 miles of pipeline and 63 terminal and storage facilities that store and distribute crude oil, refined products, renewable fuels, ammonia and specialty liquids,” according to the company.

Southwest Power Pool slammed in FERC complaint for ignoring natural gas reliability issues. The Southwest Power Pool, the power grid operator for the Great Plains and Midwest, was hit with a complaint from the Sierra Club and other environmental NGOs alleging it overestimates how reliable natural gas power plants are while underestimating wind power.

“Sadly, SPP’s proposal fails to account for a well-documented record of coal and gas plant failures during recent bouts of extreme cold, when power shortages are most likely,” the groups said as they announced their complaint. “Importantly, utilities also use SPP’s accreditation values to help decide what power resources to build in the future.”

The NGO’s complaint warns of reliability risks to the region’s power grid and costs for ratepayers, as well as the impacts for competition between fossil fuel and renewable energy in the region’s power generation mix.

“The main source of risk on SPP’s system today is from its coal and gas fleet underperforming their expected capacity value,” said Greg Wannier, a senior attorney for the Sierra Club, “and yet system outages are often wrongly pinned on the energy transition.”

In an email to The Capitol Forum, an SPP spokesperson acknowledged its existing methodologies “don’t accurately reflect” generators’ ability to deliver, but said SPP’s proposal “specifically addresses concerns regarding generators that are off-line during extreme weather events.”

“Like other grid operators across the country, SPP has experienced significant resource adequacy issues over the last several years,” SPP spokesperson Megan Sever told The Capitol Forum. “The demand for electricity has risen over a period also marked by more frequent severe weather events and as renewable energy makes up an ever-increasing percentage of our generation fleet.”

“Our highest priority is to ensure the reliable delivery of electricity across our service territory, and improved accreditation of resources is a critical component of that effort,” Sever continued. “Our proposed methodologies consider the historical performance of both conventional and variable resources and their relative contributions to system reliability, and we believe these improvements will enable us to better coordinate system reliability based on appropriate expectations regarding resource availability.”

Natural gas power generation has repeatedly struggled during winter storms, often causing problems in SPP member states, with natural gas output plummeting during winter cold as gas wells and pipelines experience “freeze offs” and other issues.

Graphic source: Energy Information Administration, March 13, 2024 post.

A November FERC report on Winter Storm Elliott, which hammered the Eastern US around Christmas 2022, found that “while some changes were implemented in response to previous cold weather events, generators and natural gas supply and infrastructure remain vulnerable to extreme cold weather.”

The groups said their complaint to FERC and an accompanying protest before FERC are aimed at speeding along a stakeholder process that’s gone on nearly a year since FERC last intervened.

“Both SPP’s current and proposed capacity accreditation create a competitive disadvantage for wind and solar,” said Earthjustice, which joined Sierra Club in the moves, “and if left unchecked, will ramp up prices for ratepayers as utilities are artificially incentivized to overbuild gas resources and delay coal retirements.”

The Energy Transition

DOI finalizes rule reducing oil and gas waste on public and tribal lands. The Department of the Interior announced a final rule at the end of March that aims to reduce natural gas waste from oil and gas leases administered by the Bureau of Land Management for public and tribal lands.

The rule requires the use of advanced technologies and best management practices to reduce the percentage of natural gas lost to venting and flaring, which are processes that burn natural gas that has been intentionally released. From 2010 to 2020, the amount of natural gas lost to these processes on federal and tribal onshore leases averaged 44.2 billion cubic feet per year.

The rule will also ensure compensation when natural gas is wasted, stating that “public and Indian mineral owners” will be “compensated for the wasted gas through royalty payments.”

“This final rule, which updates 40-year-old regulations, furthers the Biden-Harris administration’s goals to prevent waste, protect our environment, and ensure a fair return to American taxpayers,” said Secretary Deb Haaland. “By leveraging modern technology and best practices to reduce natural gas waste, we are taking long-overdue steps that will increase accountability for oil and gas operators and benefit energy communities now and for generations to come.”

According to a press release about the rule, it responds to a series of Government Accountability Office reports “highlighting revenue lost due to the BLM’s outdated regulations.”

Reducing well leaks has been a priority of the Biden administration over the past few years, as The Capitol Forum has reported with regards to the Infrastructure Investment and Jobs Act.